James Montier: The Advent of a Cynical Bubble

James Montier is one of my favorite market strategists. He is really good on behavioral economics. And his work inspired one of my favorite posts here on 17th century philosophers Descartes and Spinoza. James is also very good on his macro because he understands modern money and the sectoral balances framework of the late Wynne Godley.

Back during the financial crisis, James worked with Albert Edwards and Dylan Grice at French bank Societe Generale. And the three of them were a fearsome research trio. Unfortunately Dylan and James left the buyside. So Albert is holding down the fort at SocGen. And you can see what he’s saying from some of my recent posts.

But James has some new stuff out from his perch at fund manager GMO. That’s the Boston-based fund manager whose G stands for founder Jeremy Grantham, whose market viewpoints I have detailed in the last few weeks.

Extreme Overvaluation

The title of James’ last piece: The Advent of a Cynical Bubble. Here’s the gist:

That the US equity market is obscenely overvalued can hardly be news to anyone. Even a cursory glance at Exhibit 1 reveals that we are now at the second most expensive level of the Shiller P/E ever seen – surpassed only by the TMT bubble of the late 1990s!

Montier on S&P 500 P-E ratio using a Shiller P-E

Only a handful of what we might call valuation deniers remain. They are dedicated to finding new and inventive ways to make equities look reasonable, and they have never yet met a bull market that they didn’t love.

So where Grantham was saying he was looking for a melt-up as confirmation of a bubble, James Montier is saying all indications are already there that we have a bubble.

Managers are Overweight Equities

He acknowledges that the Shiller P/E has its detractors. But it isn’t the only metric showing extreme overvaluation in US equity markets. And survey data shows that fund managers know this. Yet, these same money managers are fully invested and overweight stocks.

Montier on net asset allocation of fund managers

Source: GMO

Now Grantham has said that the rest of the world offers relative value. And a chart from James clearly indicates this. The valuation differential is about the largest since the 1980s.

Montier on Shiller P-E in the US vs the rest of the world

Source: GMO

But, these markets are not undervalued either. Look at India, for example. It’s up 145% in 4 years and sports a 24x trailing multiple. That ain’t cheap.


In the US, though, it’s puzzling that everyone is fully invested. James calls it cynical. Everyone sees the overvaluation in stocks. But they act as if they believe they can get out before the bottom falls out. This will end badly though. Montier quotes Keynes to close his piece:

It is the nature of organized investment markets, under the influence of purchasers largely ignorant of what they are buying and speculators who are more concerned with forecasting the next shift of market sentiment than with a reasonable estimate of future yield of capital – assets, that, when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and catastrophic force.

Caveat emptor.

Source: The Advent of a Cynical Bubble, James Montier, GMO

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